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Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis

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  • Joseph E. Gagnon

    ()
    (Peterson Institute for International Economics)

Abstract

Inflation targeting countries with flexible exchange rates performed better during the global financial crisis and its aftermath than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it. But, abandoning a hard fix during a crisis is itself evidence of the economic costs of fixed rates. It is particularly telling that no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are averse to volatile exchange rates—they have a "fear of floating." Gagnon's results strongly suggest that flexible exchange rates enable countries to weather crises better than fixed rates and that the benefits of flexible rates are not limited to large countries. Policymakers should replace their fear of floating with a fear of fixing.

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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB13-28.

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Date of creation: Nov 2013
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Handle: RePEc:iie:pbrief:pb13-28

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  1. Anders Aslund, 2010. "The Last Shall Be the First: The East European Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 5218, July.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 838, C.E.P.R. Discussion Papers.
  4. Rose, Andrew K., 2013. "Surprising similarities: recent monetary regimes of small economies," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov, pages 1-44.
  5. Michael W. Klein & Jay C. Shambaugh, 2010. "Exchange Rate Regimes in the Modern Era," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262013657, December.
  6. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 3-24, Spring.
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